Exchange Rate Dynamics with Stock/Flow Interaction

Niehans, Jürg

doi:10.1086/260635

Cited by 86 publications

(15 citation statements)

References 5 publications

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“…The principal statement of this view is found in the "exchange rate overshooting" hypothesis popularized by Dornbusch (1976 and and similar results are stressed in subsequent work such as Mathieson (1977) ; Bilson (1979) and Witte (1979). The opposite view, however, is expressed by Niehans (1977) who argues that the main drawback of Dornbusch (1976) (and of subsequent work within that framework) is the neglect of the interaction between trade flows and asset stocks. Thus, Niehans (op.…”

Section: Introductionmentioning

confidence: 88%

Exchange Rate Overshooting Revisited*

Bhandari

1981

The Manchester School

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I INTRODUCTIONRecent work on floating exchange rates has emphasized the short-run volatility of exchange rates, especially in response t o unanticipated monetary disturbances. The principal statement of this view is found in the "exchange rate overshooting" hypothesis popularized by Dornbusch (1976 and 1979) and similar results are stressed in subsequent work such as Mathieson (1977) ; Bilson (1979) and Witte (1979). The opposite view, however, is expressed by Niehans (1977) who argues that the main drawback of Dornbusch (1976) (and of subsequent work within that framework) is the neglect of the interaction between trade flows and asset stocks. Thus, Niehans (op. cit.) finds that monetary expansion is inevitably associated not with "overshooting" but with "undershooting" of instantaneous exchange rates. Niehans's analysis, while interesting, is however marred by limitations of its own. For example, the real sector is completely excluded and all considerations of expectations and of the capital account (which appears to be an important, source of exchange rate volatility) are ignored. This paper may be viewed as an extension of the Dornbusch and Niehans lines of inquiry and is an attempt to integrate them. Specifically, it extends Niehans's analysis by incorporating interest-bearing assets and expectations as well as by providing a role for the trade and capital accounts. It also generalizes Dornbusch's work by allowing for non-instantaneous adjustment in money and security markets. The resulting framework involves considerable interplay between the real and asset sectors of the economy and an implication of the analysis is that unlike Dornbusch (1976), the short-run exchange rate is not determined excluGively in asset markets but instead by the full general equilibrium interaction of commodity and asset markets and only in special cases (of which Dornbusch's work is one example) does a valid dichotomy exist. 'Manuscript received 14.3.80; final version received 2.2.81. tThs is a revisedversion of an earlier paper written in February, 1980. entitled "On Exchange Rate Behaviour With Lagged Asset Adjustment". The author has benefited from reading an unpublished paper by Jacob Frenkel. 165

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Section: Introductionmentioning

confidence: 88%

Exchange Rate Overshooting Revisited*

Bhandari

1981

The Manchester School

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“…38Kouri (1976) develops the idea that the current exchange rate, which depends primarily on the conditions of asset market equilibrium, affects the current account balance which determines the rate of change of foreign asset positions; change of these asset positions, in turn, feedback through the conditions of asset market equilibrium to determine the rate of change of the exchange rate. similar view of the essential elements in the dynamic interaction between the exchange rate and the current account is embodied in the models developed by Branson (1977), Branson, Haltunen and Masson (1977), Calvo and Rodriguez (1977), Dornbusch and Fischer (1980), Flood (1981), Niehans (1977), and Rodriguez (1980). 39me importance of these elements in understanding the dynamic behavior of the real exchange rate and its relation to the current account is emphasized in Mussa (1980).…”

Section: 2mentioning

confidence: 96%

“…27For variety of additional models linking the exchange rate to the current account see Niehans (1977), Rodriguez (1980), Dornbusch and Fischer (1980), Mussa (1980Mussa ( , 1982, Kiinbrough (1980), Shafer (1980) and Frenkel and Rodriguez (1982).…”

Section: 2mentioning

confidence: 99%

Asset Markets, Exchange Rates and the Balance of Payments

Frenkel

Mussa

1984

110

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Issues discussed in this context include purchasing power parities, nontraded goods, the real exchange rate, currency substitution and the interaction between real and monetary factors in effecting exchange rates. The paper proceeds with a presentation of a more general framework that views the question of exchange rate determination as part of the general theory of the determination of asset prices, and which highlights the unique role of expectations. The general framework is then applied to characterize the interaction between the balance of payments and the equilibrium real exchange rate. The paper concludes with a brief discussion of some empirical issues of exchange rate analysis.

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“…Examples of these models are Mundell [1962], and Dornbusch [1976]. Among these elegant yet simpler portfolio balance approaches, we note in particular the earlier work by Niehans [1977], Dornbusch and Fisher [1980], and Rodriguez [1980]. In these first generation models the current account plays an important role in determining exchange rates, 3 but this role is at times ambiguous.…”

Section: First and Second Generation Portfolio Balance Modelsmentioning

confidence: 99%

Central bank intervention, the current account, and exchange rates

Larrain

2003

International Advances in Economic Research

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Exchange Rate Dynamics with Stock/Flow Interaction

Cited by 86 publications

References 5 publications

Exchange Rate Overshooting Revisited*

Exchange Rate Overshooting Revisited*

Asset Markets, Exchange Rates and the Balance of Payments

Central bank intervention, the current account, and exchange rates

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